The proposed “Robin Hood Tax” was in the news again last week with the launch of a video backing the move featuring film star Bill Nighy and others. It is easy to see why the idea has proven to be so seductive: simple solutions have an undeniable allure. Simplicity is a virtue in itself and all things being equal, a simple solution ought to be preferred to a less simple one. But there is a danger of being dazzled by the apparent simplicity of a proposed solution.

The Financial Transaction Tax (FTT), or what Oxfam and other campaigners like to style as the “Robin Hood Tax”, refers in this case to the European Commission’s proposal for a tax of 0.1% on the transfer of shares, bonds and other financial instruments, and 0.01% on derivatives.

The FTT is presented as a “simple” solution to any number of problems, many of which are clearly deserving of attention. A “tiny” tax on financial transactions that will raise huge revenues to be used towards good causes? What is there not to like?

For a start, this solution is not as simple as it is portrayed to be, and there are better options for raising revenues from the financial sector. Unfortunately, these options might appear “technical”, perhaps “boring”, and certainly less likely to catch the public’s imagination.

Let’s assume everyone agrees a further tax on the financial sector should be introduced and that its goal is to raise revenue. Is the FTT the right tax to introduce? All taxes are problematic. They can be avoided; it is hard to know in advance how much revenue they will raise; they create distortions and thus economic loss; and they can be passed on to unintended parties. Still, some taxes are better than others.

The FTT performs badly on each of these criteria, particularly relative to the Financial Activities Tax (FAT) recently proposed by the IMF (essentially a tax on profits plus remuneration). Ironically, this much can be fathomed from the extensive evidence compiled by the European Commission in support of the FTT it first proposed in 2011.

Proponents of the FTT who believe opponents of the tax are biased should read the commission’s own evidence, particularly the 2011 Impact Assessment which contains the bulk of its analysis. Surely the commission does not have a vested interest or bias against the FTT.

Four criteria to evaluate a tax

At least four points are important. First, while all taxes can and will be avoided, FTTs remain particularly susceptible to avoidance. Financial market participants will relocate to countries where the tax does not apply, move their activities there, or create non-taxed substitutes for taxed transactions. The Commission notes, for example, that the tax base for the OTC derivative market “could largely disappear leaving no substantial revenue”. Designing an FTT which is robust to avoidance is not simple.

Second, because of the very nature of its tax base, the FTT does not provide a predictable and stable source of revenue. In fact, the recently introduced Italian and French FTTs have both fallen woefully short of their expected revenue targets. In 2012, the French government estimated 2013 revenues to be about €1.5 billion but the latest estimates suggest a figure close to €690 million. Figures for 2014 are forecast to be €701m. The Italian experience has been similar. When introduced, the Italian FTT was forecast to raise €1 billion a year but between March and October 2013, the tax only raised €159 million.

Third, while all taxes – apart from lump sum taxes – will cause distortions and thus economic loss, the FTT is particularly distortive. Focusing on the tax’s potential revenues is simplistic. One must also consider the economic loss a tax will produce, for example as a result of an increase in firms’ cost of capital and the consequent reduction in investment. Apart from everything else, this ultimately leads to lower revenues from existing taxes.

Finally, as the commission notes, the FTT is likely to be passed on to final consumers. This makes an evaluation of the tax more difficult; whether or not it can be labelled a “Robin Hood Tax” presumably depends on whether it falls on the rich. We are not entirely sure who will really bear the tax, but “final consumers” here certainly include anyone with savings tied up in their pension. If the aim is to introduce a new tax on the rich, then why not simply do that? The best way to tax the rich is to tax the rich – for example, through a wealth tax – not to try to introduce a tax on trading in complex financial instruments, especially when it is uncertain who would actually pay.

Better FAT than FTT

If we stick with a financial sector tax, we have reason to believe that the FAT proposed by the IMF would be a better option on each of the above criteria – and this is generally confirmed by the Commission’s own analysis. A FAT would be harder to avoid, provide more predictable and stable revenues, raise the same amount of revenue with less economic loss and it would be more likely to fall on its intended target. All in all it appears to be a better option to raise revenue from the financial sector.

Some argue that focusing on the FTT as a revenue raiser ignores one of its main benefits, namely its ability to reduce short-term, and particularly high-frequency trading. In fact, this is one of the objectives of the proposal. But the Commission itself admits that the existing evidence on the impact of these transactions on market efficiency is inconclusive. In any event, FTTs bluntly hit “good” and “harmful” transactions alike; concerns over high-frequency trading are better addressed by targeted regulation.

Evidence suggests that there are better ways of raising revenue from the financial sector – or from rich individuals – than through an FTT. While politically convenient, its ostensible simplicity certainly does not make it the right solution.